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Wednesday, April 11, 2018

Sales Tax Discounts - Still Warranted?

I've got a blog post on the sales tax discounts that several states offer to vendors to help address the costs they incur in getting sales tax remitted. See below for post originally at on 4/10/18. Two things caught my attention recently that led to me to this topic.

1. Governor Greitens of Missouri has proposed repealing that states 2% unlimited discount. Certainly, it would raise revenue, but he also states that with improve compliance technology, the discount is no longer needed.

2. I reviewed many parts of Texas' tax law in preparing for testimony I presented to the Texas Commission on Public School Finance on April 5. I first noticed that they gave a discount for paying hotel taxes on time. They also have penalties for filing and paying late. The discount along with the penalty seemed to me worth addressing. After all, who gets a bonus for doing what they are supposed to do? I have not heard of employees getting bonuses for showing up for work on time. I also noted they had both a discount and a prepayment bonus in their sales tax system. A prepayment bonus is intriguing and one that technology can certain eliminate the need for.  If states want their tax dollars earlier, such as to pay bills rather than have to borrow to pay bills, why not use technology to get the payment to the government real time rather than have the sales tax first go to the vendor and then to the government (see my 6/23/08 (!) post for this topic).

For more on discounts, what states use them, which have limits and which do not and the tax policy considerations of them, please take a look at the post.

What do you think?

With Sales Tax Software, Are Sales Tax Discounts Still Appropriate?

Anyone looking at their sales receipt upon leaving a store will believe they paid the sales tax rather than the vendor. The vendor though, must maintain proper records, file a sales tax form and remit the sales tax collected from customers. Should the vendor be compensated for its efforts? Many states do so, typically referred to as a vendor discount.
The Federation of Tax Administrators maintains a list of what each state offers as a discount, if any, and if there is a cap on that amount. The discount is often based on a percentage of tax collected. The likely rationale for providing a minimum is that the compliance costs are unlikely to increase much as the amount to collect and remit goes up. But not all states have a cap on the discount.
Per the FTA list, 28 states offer a discount with 18 of them imposing a cap on the discount. The discount amount ranges from .25% in Nevada to 5% in Alabama and New York. Some states have a range of percentages, typically, higher for a initial stated amount of collections, and decreasing for collections above that amount, to account for the economies of scale that exist in the compliance process. The discount is also likely to only apply for timely compliance.
Why don't all states offer a discount? Well, cost is an obvious one. The discount in effect lowers the rate of the sales tax. The 0.5% discount offered by Texas cost the state $132 million in 2017. Texas also offers a 1.25% early payment discount which also cost the state about $132 million in 2017. These are significant costs for governments running on tight budgets.
States that don't offer a discount may also just view the collection costs as the cost of doing business. That hinders economic efficiency though in that not all businesses have to collect sales tax.
Missouri Governor Greitens has proposed repealing the state's sales tax discount as part of a tax reform plan to lower rates and close loopholes. His rationale for repealing the state's uncapped 2% discount for sales tax collection follows (from a 1/29/18 press release):
"Eliminating Timely Filing Discounts: Missouri currently offers a 2% discount to businesses for filing withholding taxes on time. Missouri is one of the only states in the country to provide an uncapped discount as high as 2% to vendors for filing sales taxes on time. At one time in history, it was a great difficulty for businesses to manually calculate and send their sales tax to state and local governments. This discount was intended to factor those difficulties into the tax collection system, and reward those who paid their taxes on time. Today, with modern technology, paying taxes on time is the norm, not the exception. In effect, Missouri's tax system rewards businesses for doing what they are required to do by state law. Families do not see a similar discount for following the law, and the issue that this attempts to address is not relevant in today's modern economy. These discounts complicate the tax code and offer no competitive advantage to Missouri. The Withholding Tax Timely Filing Discount and Vendor Timely Filing Discount should be eliminated, in favor of a simple reduction in tax rates."
So, Governor Eric Greitens raises another consideration for not offering a discount for sales tax compliance - technology has lowered the costs.
Well, technology has certainly made sales tax compliance a lot easier in recent years, but it still requires purchase and maintenance of the software and hardware, as well as humans to make it all work.
Perhaps it would be better to lower the discount percentage and impose a cap. For Texas and any other state offering a discount for early payment, technology should be considered that would allow the sales tax to go directly to the state at time of sale without even the need to file a return (even cash payments could be converted into immediate transfer of the sales tax when those deposits are made to the bank). That is, when a person's credit card is charged, the cost of the goods are charged to the vendor and the sales tax is charged to the state (who also then pays the credit card charge fee for the tax rather than the vendor). (See Texas Comptroller report, pages 12 - 15.)
The topic of sales tax discounts for vendors could get even more attention in all states with a sales tax should the U.S. Supreme Court rule for South Dakota in the South Dakota v. Wayfair case it will hear on April 17, 2018. If vendors without a physical presence in a state have to collect sales tax from customers in those states, their compliance costs will go up (including for the technology they will need) and they are likely to demand some type of compensation.
We'll see what happens in Missouri and more broadly.
Your thoughts?


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